Download CHAPTER THREE DEMAND AND SUPPLY • Demand law • Supply

CHAPTER THREE
DEMAND AND SUPPLY
 Demand law
 Supply law
 Draw demand and supply curves
 Calculate elasticity
 Differences between change in demand
quantity and change in demand
 Differences between change in supply
quantity and change in supply
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1. What does demand mean?
In a free market mechanism prices of goods are determined
by the interaction of supply and demand.
Demand:
Demand is the amount consumers are willing and able to
purchase at given prices during a period of time.
Demand Law:
There is an inverse relationship between the prices and
quantity of goods.
As prices increases the quantity of demand decreases.
We can notice that from the following table and figure.
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If you have the following schedule
Price
Quantity of demand
2
12
3
10
4
8
5
6
6
4
7
2
Draw the Demand Curve
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2. What does supply mean?
Supply:
Supply is the amount producers are willing to offer and sell
at given prices during a period of time.
Supply Law:
There is a direct (positive) relationship between the prices
and quantity of goods.
As prices increases the quantity of supply increases too.
We can notice that from the following table and figure.
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If you have the following schedule
Price
Quantity of Supply
2
2
3
4
4
6
5
8
6
10
7
12
Draw the Supply Curve
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3. Using the following table shows the demand and
supply quantities answer the following questions:
price
Quantity of demand
Quantity of Supply
2
12
4
3
10
6
4
8
8
5
6
10
6
4
12
7
2
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a- Define the equilibrium price and equilibrium quantity
Equilibrium Price:
Equilibrium Price is the price that demanded quantity equals
the supplied quantity.
Equilibrium Quantity:
Equilibrium Quantity is the quantity demanded and supplied
of good corresponding to the equilibrium price.
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b- Draw demand curve and supply curve. And show the
equilibrium price and equilibrium quantity.
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c- What does elasticity mean and how could be
calculated?
There are two kinds of elasticity:
a) Elasticity of Demand:
The response of quantity demanded to change in price
b) Elasticity of Supply:
The response of quantity supplied to change in price.
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d- Calculate the elasticity of demand when prices
increased from 5 to 6.
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4. What is the difference between "changing in demand
quantities" term and "changing in demand" term?
There is more than one condition of demand and they have
a different impact:
The condition
The impact
1. Prices
Changing in the demand quantities
2. Income
Changing in demand
3. Taste of fashion
4. Prices of other
complements and
substitution goods
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5. What is the difference between "changing in supply
quantities" term and "changing in supply" term?
There is more than one condition of supply and they have a
different impact:
The condition
The impact
1. Prices
Changing in the supply quantities
2. Costs
Changing in supply
3. Taxes & Incentives
4. profit expectations
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6. What are the kinds of elasticity of demand or supply?
There are five degrees of elasticity
=
1
= Zero
When elasticity
Unit elasticity
Perfectly inelastic
=
α
Perfectly elastic
>
1
elastic
<
1
inelastic
Perfectly inelastic: is when there is no response in
(supplied or demanded) quantity to change of prices.
Examples: medicines, food, heath care and any other
necessary goods or services.
Perfectly elastic: is when there is a huge response in
(supplied or demanded) quantity to very little change of
prices.
Examples: villas, expensive brands of cars, Perfumes,
expensive brands of clothes, and any other luxury goods
and services.
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7. What are the uses of measuring elasticity of
demand?
 Salesman decides to raise its revenue by ably discount
on some of goods he sells in his shop.
Salesman must ably this discount on goods have
elasticity demand (such as perfumes), and not goods
have inelasticity demand (such as food items).
 Government decides to raise its revenue by ably taxes
on some of goods.
Government must ably this taxes on goods have
inelasticity demand (such as electricity bill and petrol
for cars and factors), and not goods have elasticity
demand (such as perfumes).
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